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Master Degree Project in Logistics and Transport Management

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Hanjin Shipping: Slow-Steaming into Bankruptcy

Causes and Effects

Jonna Pauli and Mathias Wolf

Supervisor: Kevin Cullinane Graduate School

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Abstract

Container shipping is vital to and a driving force behind global economic growth. One of the industry’s largest carriers collapsed in August 2016, an event of unprecedented magnitude and predicted to cause major disruptions for world trade. Hanjin Shipping was Korea’s main container shipping line and played an essential role for the country that is exceedingly dependent on seaborne trade. The carrier collapsed at a time when market conditions had gotten progressively worse and market participants believed that a bankruptcy would be imminent. The causes and effects of Hanjin Shipping’s demise were not only exceedingly complex but also highly debated. Thus, the purpose of this paper was to investigate the contributing factors to Hanjin Shipping’s insolvency and its effects. A qualitative case study was conducted by means of in-depth interviews with seven respondents with extensive knowledge of the container shipping industry. The findings suggest that Hanjin Shipping’s demise was a combination of a number of interdependent factors. The carrier’s managerial decisions played a decisive role in its collapse and can be traced back to its operational, investment and financial strategies. These decisions were implemented over the course of several years and were based on developments of the changing, external market conditions the carrier operated under. The actors closest to Hanjin Shipping, in particular its fellow alliance members and customers, as well as the international shipping industry did not suffer too severe consequences from the carrier’s bankruptcy, but the Korean economy at large has been affected more profoundly.

Keywords: Hanjin Shipping, Container shipping industry, Maritime, Container liner shipping bankruptcy, Shipping management, Shipping finance, Korea, CKYHE

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Acknowledgement

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We!would!like!to!express!our!gratitude!towards!our!supervisor!Kevin!Cullinane,!at!the!

School!of!Business,!Economics!and!Law!at!the!University!of!Gothenburg,!for!his!input!

and!support!during!the!writing!process!of!this!thesis.!

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We!would!also!like!to!thank!each!of!our!interview!respondents!for!providing!invaluable!

insights.!

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Abbreviations

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General

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BAF Bunker Adjustment Factor

BBC/PO Bareboat Charter with Purchasing Option BBCHP Bareboat Charterhire Purchase

CAF Currency Adjustment Factor

CCFI China Containerised Freight Index

CSL Container Shipping Line

CTO Container Terminal Operators

DWT Deadweight Tonnage

HPH Hutchison Port Holdings

KDB Korea Development Bank

LSCI Liner Shipping Connectivity Index M&A Mergers and Acquisitions

MOF Ministry of Oceans and Fisheries

OECD Organisation for Economic Co-operation and Development

PA Port Authority

PSA Port of Singapore Authority

SPV Special Purpose Vehicle

TEU Twenty-foot Equivalent Unit

THC Terminal Handling Charges

TOC Terminal Operating Company

UNCTAD United Nations Conference on Trade and Development

VLCS Very Large Container Ship

WMU World Maritime University

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Carriers, alliances and agents

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APL American President Lines

CKYH(E) Alliance of COSCO, K-Line, Yangming, HJS (and Evergreen) CMA CGM Compagnie Maritime D'affrètement - Compagnie Générale Maritime

COSCO China Ocean Shipping Company

CSCL China Shipping Container Lines

DSR Deutsche Seereederei

HJS Hanjin Shipping

HMM Hyundai Merchant Marine

K Line Kawasaki Kisen Kaisha

KSC Korea Shipping Corporation

MOL Mitsui O.S.K. Lines

MSC Mediterranean Shipping Company

NOL Neptune Orient Lines

NYK Nippon Yusen Kabushiki Kaisha

OLA Overseas Liner Agencies

OOCL Orient Overseas Container Line

P&O Peninsular and Oriental Steam Navigation Company

UASC United Arab Shipping Company

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TABLE OF CONTENTS

1.#INTRODUCTION# 1!

1.1#Background# 1!

1.2#Problem#Discussion# 2!

1.3#Purpose#of#the#Study# 4!

1.4#Research#Questions# 4!

1.5#Delimitations# 5!

1.6#Disposition# 6!

2.#METHODOLOGY# 7!

2.1#Research#Approach# 7!

2.2#Research#Design# 8!

! 2.2.1!Literature!Collection!...!9!

! 2.2.2!Data!Collection!...!10!

! 2.2.2.1!Interviews!...!11!

! 2.2.2.2!Selection!of!Respondents!...!12!

! 2.2.3!Data!analysis!...!13!

2.3#Validity#and#Reliability# 14! 2.4#Summary#of#Methodology# 15! 3.#LITERATURE#REVIEW# 16! 3.1#The#International#Shipping#Industry# 16! ! 3.1.1!Shipping!Cycles!and!Uncertainty!...!17!

! 3.1.2!Supply!and!Demand!...!18!

! 3.1.2.1!Demand!...!19!

! 3.1.2.2!Supply!...!20!

! 3.1.3!Freight!Rates!...!22!

! 3.1.4!Owner!Structure!and!Contracts!...!23!

! 3.1.5!Market!Developments!...!24!

! 3.1.5.1!Alliances!...!25!

! 3.1.5.2!Mergers!and!Acquisitions!(M&As)!...!27!

! 3.1.5.3!Geographical!Concentration!...!27!

! 3.1.6!Finance!and!Investments!...!29!

! 3.1.6.1!Impact!of!the!Financial!Crisis!...!30!

! 3.1.7!Operations!...!32!

3.2#The#Korean#Maritime#Sector# 34! ! 3.2.1!Korea’s!Economy!and!Shipping!Industry!...!34!

! 3.2.2!The!Korean!Shipping!Sector!and!Governmental!Action!...!35!

! 3.2.3!Corruption!...!37!

! 3.2.4!Deregulation,!Liberalisation!and!the!Asian!Financial!Crisis!...!38!

! 3.2.5!Port!Governance!...!39!

! 3.2.6!Shipyards!...!42!

! 3.2.7!Container!Shipping!Lines!...!46!

3.3#Hanjin#Shipping# 48!

3.4#Summary#of#Theories# 51!

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4.#FINDINGS# 53!

4.1#Contextual#Background# 53!

! 4.1.2!Developments!between!2003\2016!...!54!

4.2#Results# 58! ! 4.2.1!External!Factors!...!59!

! 4.2.1.1!Market!Conditions!...!59!

! 4.2.1.2!Preferential!Treatment!...!60!

! ! 4.2.1.3!Chaebols!and!the!government!...!62!

! 4.2.1.4!Corruption!...!62!

! 4.2.1.5!The!Korean!Maritime!Sector!–!A!Public!Good?!...!63!

! 4.2.1.6!Cho!Yang!and!HJS!...!64!

! 4.2.1.7!National!CSLs!...!65!

! 4.2.1.8!The!Role!of!the!KDB!...!66!

! 4.2.2!Internal!Factors!...!67!

! 4.2.2.1!(Mis)management!...!67!

! 4.2.2.2!Operational!strategy!...!68!

! 4.2.2.3!Investment!Strategy!...!70!

! 4.2.2.4!Financial!Strategy!...!71!

! 4.2.3!Effects!on!the!CKY(H)E!(SQ1)!...!75!

! 4.2.4!Customers!(SQ1)!...!76!

! 4.2.5!Effects!on!the!Korean!Economy!(SQ2)!...!77!

! 4.2.6!The!International!Shipping!Industry!(SQ3)!...!78!

! 4.2.6.1!Direct!Consequences!...!78!

! 4.2.6.2!Indirect!Effects!...!80!

5.#DISCUSSION# 82! 5.1#Answers#to#the#Main#Research#Question# 82! ! 5.1.1!Operational!Strategy!...!82!

! 5.1.2!Investment!Strategy!...!86!

! 5.1.3!Financial!Strategy!...!87!

! 5.1.3.1!Charter!Strategy!...!88!

! 5.1.3.2!Relationship!with!the!Korean!Financial!Sector!...!89!

! 5.1.4!Restructuring!of!the!Korean!Maritime!Sector!...!91!

! 5.1.4.1!Economic!Perspective!...!91!

! 5.1.4.2!Corruption!Perspective!...!92!

5.2#Answers#to#the#SubYQuestions# 93! ! 5.2.1!Direct!Consequences!for!the!CKYHE!and!Customers!...!93!

! 5.2.2!Impact!on!the!Korean!Economy!...!94!

! 5.2.3!Effects!Related!to!the!International!Shipping!Industry!...!95!

6.#CONCLUSIONS# 97!

6.1#Main#Conclusions# 98!

6.2#Limitations# 100!

6.3#Future#Research# 100!

REFERENCES# 102!

APPENDIX#1# 120!

APPENDIX#2# 121!

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List of Tables

1. Interview Topics ... 11

2. Main Criteria for Demand and Supply ... 19

3. Identified Themes from the Literature Review ... 52

4. HJS’ Service Lanes. ... 53

5. Overview of the Respondents ... 58

6. Assessment of the Respondents’ Answers. ... 84

List of Figures 1. Chapter Overview ... 6

2. Average Debt-to-Equity Ratio for the Liner Shipping Industry ... 31

3. Geographical Location of and Major Ports in Korea ... 40

4. Arrangement of BBCPO ... 44

5. Traditional Shipbuilding Business Cycle ... 44

6. Heavy Fuel Oil Price in USD per Ton, Jan. 2007 to Jan. 2017 ... 55

7. CCFI Composite Index, 2008-2017 ... 56

8. Breakdown of Trade Routes by Revenues ... 69

9. Development of HJS’ Investments, 2004-2016 ... 70

10. HJS’ Operational Results, 2003 – 2016 ... 71

11. Development of Corporate Bonds ... 72

12. Development of Total Liabilities and Debt-to-Equity Ratio, 2003-2016. ... 73

13. Number of HJS’ Ships with Cargo from Other CSLs... 76

14. Relationships Between Identified Factors ... 83

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1. I

NTRODUCTION

This chapter presents a brief overview over the Hanjin Shipping bankruptcy and the events linked thereto, in order to enable a better understanding of this thesis and the material that follows, before a more detailed explanation for the container shipping line’s (CSL) collapse is presented. This chapter also provides the motivation for the chosen research questions and lastly explain the overall structure of this paper.

1.1 Background

Until 2016, Hanjin Shipping Co., Ltd. (hereafter HJS) was the dominating national carrier of the Republic of Korea (henceforth Korea) and one of the top ten players in the global shipping industry (UNCTAD, 2016) with revenues in excess of USD 6.8 billion in 2015 (Hanjin Shipping, 2016). Yet, despite whatever positive impression these numbers might convey of the CSL, HJS filed for corporate rehabilitation1 in August 2016 and was officially declared bankrupt only six months later. The ripple effect that followed the collapse is claimed to have significantly impacted and continues to affect the entire container shipping industry (AlixPartners, 2017; Cashen, 2016; Kuo, Lin, & Lu, 2017; Ryan, 2016), which pressures other carriers to carefully re-examine their own strategies but how should they react to the sudden collapse and what kind of decisions should be made? These decisions depend on what caused the failure of HJS (e.g. internal and/or external criteria) and how its demise will affect the industry.

Since the 20th century, the shipping industry has become more complex and capricious due to its competitive environment and augmented customer demands (Sys, 2009) and the container shipping industry has developed increasingly more oligopolistic characteristics (Álvarez- SanJaime, Cantos-Sánchez, Moner-Colonques, & Sempere-Monerris, 2013; Sys, 2009), where 50% of the market was expected to be controlled by the top five carriers in 2016, compared to only 23% just twenty years earlier (BRS Group, 2016). Carriers appear to have been relentlessly pursuing a strategy where ‘bigger is better’ which has led to accelerated growth in vessel size that too comes at a price. Moreover, the shipping industry which is commonly financed by significant amounts of short-term debt is extremely vulnerable to sudden external shocks. While some carriers have been stable for years, others have performed less desirably (Slack & Frémont, 2009).

The shipping industry is facing major challenges since the industry is generally slow to adapt to changing economic realities as it orders its assets years in advance and plans to use them for decades at a time (Rau & Spinler, 2016). Declining demand for maritime shipping on the Eastern Asia–Europe trade route, an economic slowdown in China (UNCTAD, 2016) and especially the effects of the financial crisis in 2007-08 (Rau & Spinler, 2016) have led to

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1A process under which a financially distressed business is evaluated as either economically viable or not. If a court determines the former of the two possible outcomes, the firm is allowed to continue to operate while submitting to a process of supervised debt restructuring while the latter leads to a declaration of insolvency.

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substantial levels of overcapacity and historically low freight rates (DSF, 2016). The whole maritime industry was affected by the financial crisis but container liner shipping in particular should turn out to be the single most distressed segment (UNCTAD, 2010).

Shipping demand shrank by 9.0% while supply grew by 5.1% in 2009, making it the first time ever that container shipping experienced a decline in demand. Initially, larger carriers disregarded financial losses and made new capital expenditures in order to enhance their market share, forcing other carriers to follow the same strategy or to be gradually crowded out of the market which exacerbated an already precarious situation (AlixPartners, 2012;

Notteboom & Rodrigue, 2009). What is more, a prevailing trend towards the introduction of ever larger ships among carriers has additionally amplified the problem of overcapacity (OECD-ITF, 2015). However, the hitherto progressive increase of the shipping fleet has stagnated considerably since 2013, with the lowest growth rate in a decade due to the introduction of a considerable number of new-build vessels to the market in 2012 (UNCTAD, 2014).

As a result of the compounded effect of all these factors, the container shipping industry eventually faced one of the worst slowdowns in its history during 2015 (UNCTAD, 2016) and overall revenues plummeted by 16% in the third quarter, compared to the same period the previous year (AlixPartners, 2016). By 2016, Maersk (15.1% market share), MSC (13.4%), CMA CGM (9.2%), COSCO (7.8%) and Hapag-Lloyd (4.8%) were the five largest container carriers2 (UNCTAD, 2016), which highlights the fact that the industry continues to be comparatively fragmented and without any market-controlling actors. In order to become and maintain the status of being one of the top players in the industry, substantial financial commitments are required. For that reason, in particular those carriers with high liabilities are fighting for their survival (AlixPartners, 2014) and it could be argued that “[s]hipping in all its forms has lost its lustre” (BRS Group, 2016, p. 3). There have been several initiatives to address the challenging aftermath of the financial crisis, such as curbing the available capacity in order to stabilise the market (UNCTAD, 2016), yet the question remains: “is it too little, too late?” (AlixPartners, 2016, p. 4).

1.2 Problem Discussion

The Korean shipping industry found itself clearly affected by the challenging post-crisis environment after the 2007-08 financial meltdown (Ha & Seo, 2013), as Korea is highly dependent on its maritime shipping industry (Ha, Chung, & Seo, 2016; Song & Lee, 2016) and had the 7th largest container fleet in the world in 20123 (UNCTAD, 2012). The Korean shipping industry has a lot of potential, yet its carriers are considered less competitive than other global key players and the “industry faces a constant threat of market entry” from foreign carriers (Ha & Seo, 2013, p. 252). What is more, the country’s poor track record of shipping line bankruptcies in the past appears to elucidate other intrinsic flaws of the Korean maritime shipping industry, thereby, giving HJS’ own collapse a new perspective (Porter, 2016).

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2 In terms of operated container ship capacity in TEU.

3After Germany, Denmark, Japan, Greece, China, Taiwan and Singapore by dwt, based on ownership.

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HJS survived both the effects of a governmentally administered rationalisation program in the 1980s and the Asian finance crisis at the end of the 1990s4 but has been struggling since the last financial crisis. However, its importance for the Korean economy cannot be denied, as the Asian nation is exceedingly dependent on maritime shipping for its international trade.

For instance, the Korean carrier shipped 40% and 20% of the nation’s electronic giants Samsung’s and LG’s exports, respectively (Dodwell, 2016).

HJS also engaged in a variety of other activities such as the operation of a network of dedicated terminals around the globe (Hanjin Shipping, 2016). The carrier controlled a considerable number of subsidiaries in the 3PL sector that would ensure a valuable degree of vertical integration as well as an own bulk and LNG shipping division. However, about 70%

of the operating income was generated by the container segment, making it clearly the main source of income for the CSL. In fact, bulk and LNG shipping in particular generated only 4.49% of HJS’ operating income in 2015 (Hanjin Shipping, 2016) and starting in 2014, the segment was stepwise divested as activities and assets where transferred to former competitor H-Line, rendering bulk shipping essentially non-existent for HJS by April 2016 (Zeng, 2016a).

Apart from the submission to corporate rehabilitation in Korea, the carrier also received bankruptcy protection in 15 countries as time passed (Voynichenko, 2017), e.g. Canada, Germany, Japan, Singapore, the UK and the US (Zeng, 2016g). The company left nearly half a billion containers, filled with merchandise worth over USD 14 billion, stranded at sea (The Guardian, 2016b) as terminal operators around the globe refused to discharge HJS’ cargo for fear of non-payment of handling fees (Little, 2016). In other instances, HJS vessels remained at sea for weeks in order to prevent the ships’ seizure by creditors, thereby leaving unnumbered supply chains disrupted as cargo was not delivered as contracted (Waters, 2017).

These ships only started to call at ports once assurance had been given by local authorities that all assets and the transported cargo would be protected from third party claimants (van Marle, 2017). HJS’ collapse happened in the midst of the annual peak season as many American retailers waited for merchandise to arrive to fill their shelves for the holiday season (Szakonyi, 2016) and it is claimed that the companies in question and others made losses worth several millions in form of lost business deals (Waters, 2017). By February 2017, about 200,000 HJS containers had still not been recovered (Hutchins, 2017b), creating problems for container yards and ports (Morley, 2017). The collapse also created worldwide interest (e.g. Fitzergald, 2016; Lee & Lee, 2016a; The Guardian, 2016a) and major headlines such as “Hanjin Bankruptcy Causes Global Shipping Chaos” (Jablon, 2016) and “Hanjin bankruptcy: Are South Korea's 'chaebols' in crisis?” (Evans, 2016).

The Korean carrier was “widely considered “too big to fail” and expected to be rescued by a combination of group, creditor and counterparty support” (Deloitte, 2016, p. 8). However, the Korean government did not provide financial support for its largest carrier (Lee J., 2016a) and some even blamed Korea’s political leaders for the collapse of HJS (Fernholz, 2016).

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4 See section 2.2.4 for further information.

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Moreover, Yang-ho Cho, chairman of HJS’ parent company Hanjin Group, went so far as to claim that the subsidiary was not able to compete efficiently against rival carriers as many of them had governmental support (Lee J., 2016a).

In February 2017, HJS was officially declared bankrupt by a Korean court (Illmer, 2017;

Lloyd's List, 2017) and it is argued to be “by far the largest container shipping bankruptcy in history” (JOC, 2017, §2). Not to mention that it is assumed that its collapse will have immense effects on the Korean economy (Cashen, 2016), the entire container shipping industry and the global economy (Ryan, 2016; Kuo et al., 2017). Similar to the role of Lehman Brothers in the global financial crisis, the withdrawal of HJS has even been referred to as a trigger for a global shipping crisis (Salamat & Park, 2016).

1.3 Purpose of the Study

Given the anticipated magnitude of the effects of HJS’ collapse, the purpose of this study is twofold:

1. to identify the underlying causes for the liquidation of HJS and

2. to investigate anticipated impact of the liquidation from different perspectives (actors in HJS’ immediate proximity, the Korean economy and the international container shipping industry).

The findings can provide useful insights for existing individual shipping lines, to avoid making the same mistakes that lead to HJS’ collapse. The research objective is thus to establish suitable criteria that affect shipping lines’ performance and competitiveness and to provide an assessment for the potential future development of the industry in relation to the withdrawal of HJS. The consequences of the bankruptcy for the actors closest to HJS can provide valuable insights for alliance members and customers’ strategies of risk management.

Moreover, as liner shipping can have a direct impact on developments of entire economic regions and therefore, also on international trade (Lam, Yap, & Cullinane, 2007), this research could be useful both from a national (i.e. Korean) and a global perspective.

1.4 Research Questions

In line with the purpose of this study, the following research questions have been established to guide the investigation in meaningful direction:

What were the reasons behind the bankruptcy of Hanjin Shipping (RQ)?

I. How were the CKYHE members and customers affected (SQ1)?

II. What is the potential impact on the Korean economy (SQ2)?

III. How is the international container shipping industry affected in the immediate short term (SQ3)?

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The main research question (referred to as RQ) relates to identifying the causal explanations of why HJS went bankrupt. This will be answered by analysing HJS’ situation before its collapse in relation to trends in the overall container shipping industry.

The sub-questions will assess the consequences of HJS’ demise, from three different perspectives. The first sub-question (SQ1) is related to the actors that were closest to HJS, its fellow alliance members and its customers. At the time this paper is written only the short- term consequences can be readily observed, leaving the effects of HJS’ demise for the long run open to speculation. For that reason, the answering of SQ1 will largely be limited to the immediate effects of the bankruptcy and provide assumptions about future developments only when they can be established with a sufficient amount of certainty.

The effects on the economy of Korea, and in particular the maritime industry will be investigated by the second sub-question (SQ2). As this sub-question concerns the economy of an entire nation, both immediate and long-term effects will be addressed since it might take a long time until any changes will become pronounced enough to be perceptible.

The last sub-question (SQ3) deals with the effects on the container shipping industry and will be answered by conducting a thorough market analysis. Due to the industry’s inherent complexity, it would require extensive resources to analyse long-term effects which is the reason why only immediate consequences will be covered.

All questions, both main and sub-questions, will be answered by data collected from interviews and complementary secondary data.

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1.5 Delimitations

HJS belonged to the Hanjin Group but a distinction will be made between them, as HJS was (allegedly) operating independently from its parent company. Moreover, the main emphasis will lie on HJS’ ocean shipping services and not their additional services such as terminal operations due to lack of information on how these activities were performed. It can be assumed that there is relevant information about HJS and the Korean shipping industry written in Korean. However, any data in Korean will be omitted due to the authors’ lack of proficiency of the language in question.

HJS’ bankruptcy did not only affect other carriers but also other parties such as ship-owners, container lessors, freight forwarders and employees, among others. However, they will not be addressed in detail. The definition of the shipping industry in the research question is consequently mainly limited to container carriers and port operations, with one exception.

Financial data from e.g. income statements and balance sheets is likely to incorporate all of HJS’ activities and aggregate them into single values. This makes it impossible to discern their exact composition, i.e. to differentiate between sole container-related and other business activities.

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1.6 Disposition

Figure 1 visualises the disposition of this paper. The first chapter introduces the chosen field of studies and addresses the relevance of the conducted research. How the research is conducted is explained in chapter two while an overview over relevant literature, starting from a macro perspective that narrows down to the micro level, will be presented in chapter three. The findings of the data collection are summarised in chapter four. The analysis, which combines the results and literature review, is presented in chapter five. The last chapter provides the answers to the chosen research question but also addresses the weaknesses of the research.

Figure 1. Chapter Overview

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Chapter 1 •  Introduction

Chapter 2 •  Methodology

Chapter 3 •  Literature Review

Chapter 4 •  Findings

Chapter 5 •  Discussion

Chapter 6 •  Conclusions

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2. M

ETHODOLOGY

This chapter addresses how the research for this thesis is conducted in order to answer the research questions. How the authors address the topic is presented first, followed by a motivation of the structure of the whole thesis. The process of the data collection is explained next and focuses on the interviews. Then an explanation of how the data is analysed is provided. Lastly, this chapter ends with a summarised overview of the whole methodology process.

2.1 Research Approach

Analytical (or explanatory) research, which interprets causal relationships in order to explain phenomena (Collis & Hussey, 2014), is conducted as result of the descriptive and analytical nature of the research questions: What were the reasons behind the bankruptcy of Hanjin Shipping (RQ)? How were the CKHYE members and its customers affected (SQ1); what is the potential impact on the Korean economy (SQ2); and how is the container shipping industry affected in the immediate short term (SQ3)? The chosen analytical research approach is highly sophisticated and thus requires a comprehensive literature and data collection due to the complexity of the research question (Collis & Hussey, 2014). Hence, qualitative data forms the foundation for the research process, as it enables a deeper understanding of the phenomenon in its real environment (Miles, Huberman, & Saldaña, 2013, p. 11). However, quantitative data is utilised as well, e.g. the usage of financial data such as the calculations of debt-to-equity ratio, as it is often useful for qualitative research (Saunders & Lewis, 2012).

There are two purposes for conducting research, an applied and a basic one (Sekaran &

Bougie, 2013), and both purposes are relevant as a result of the duality of this study. The former is connected to the main research question (causes for the bankruptcy i.e. more specific) and even if the roots of HJS’ failure are not an existing problem (as the carrier had already gone bankrupt) that applied research attempts to solve, the identified factors can be utilised by other carriers in order to enhance their performance, i.e. the findings for the first research question also supply recommendations for a current problem. Meanwhile, the latter purpose is related to the sub-questions (the consequences of the bankruptcy i.e.

generalisation), where the authors’ predictions about the future of the container shipping industry are contributing to general knowledge and the theoretical understanding of the industry.

The research question is highly tailored towards HJS, which underlines the validity of the design of a case study. The strategy of employing a case study approach is appropriate as it aims to “gain a rich understanding of the context of the research and processes being enacted” (Saunders, Lewis, & Thornhill, 2007, p. 139). Although the emphasise is put on HJS, the findings will hopefully be beneficial to other CSLs as well and provide a deeper understanding of the whole container shipping industry. Hence, an instrumental case study is

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implemented. The authors argue that since the container shipping industry is relatively uniform (Slack, Comtois, & McCalla, 2002) where all market players make use of similar strategies (Lee & Song, 2013), the findings about HJS’ can be generalised to other carriers to a certain extent. An instrumental case study is therefore the most suitable case study approach, as it allows “the researcher to generate knowledge that extends beyond the case itself” (Eriksson & Kovalainen, 2010, p. 124).

The nature of the research questions requires a deductive approach, as the research assembles and tests various existing theories and then applies them to HJS. On the other hand, a qualitative case study suggests an inductive approach (Bryman & Bell, 2015). According to Bryman and Bell (2015), no clear distinction between deductive or inductive is needed because the chosen logic of the research should rather act as a guideline. The main focus of the research lies on deductive research due to the importance of the theories but still incorporates characteristics of inductive research.

2.2 Research Design

The structural setup of this thesis, where the methodology chapter precedes the literature review, is chosen deliberately for the following reasons. Like for most other thesis projects, the literature review chapter fundamentally serves to establish a framework that is later used in the analysis but for this thesis the introduced theories and principles are also an integral part in explaining the collapse of HJS.

The literature review and the findings utilise the same funnel approach. The literature review (chapter 3) and the findings (chapter 4) start from a macro perspective which is successively narrowed down to a micro perspective, in order to provide an overview of the industry which is required to understand HJS’ operations and decisions. However, the findings move back from company level to national and industry level when evaluating the short-term effects on the industry.

Various sources for HJS’ insolvency are initially reviewed in order to determine the key themes that are needed to be addressed in the literature review. The literature review employs a funnel approach, where theories about the shipping industry on an international level are presented in order to provide a deeper understanding of the inherent risks and challenges of the container-shipping sector. This information about the container shipping industry is vital to determine the causes of HJS’ collapse and to enable the drawing of any conclusions for the near future. CSLs do not only have to consider their own and other carriers’ strategies but also the changing nature of other aspects of the overall shipping industry, such as international trade (Drobetz, Gounopoulos, Merikas, & Schröder, 2013; Merika, Theodoropoulou, Triantafyllou, & Laios, 2015), ports (Jung, 2011; Stopford, 2009; Yeo, Roe,

& Dinwoodie, 2008), shipbuilding (Lee J.-S., 2013; Shin & Lim, 2014) etc. Various other elements also play a vital role in shaping and influencing the shipping industry and, therefore, need to be addressed as well. For instance, national characteristics also affect CSLs (Lee,

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1999; Lee, Lin, & Shin, 2012; Thanopoulou, Ryoo, & Lee, 1999) and consequently, the Korean maritime industry needs to be studied as well. In order to enhance the validity and reliability, it is considered a necessity to review academic literature on HJS. Adding an individual chapter for HJS aids the approach of progressively narrowing down the research approach from a macro to a micro level. Moreover, this section is essential for the case study strategy as a profounder knowledge of the studied company, in this case HJS, provides a better foundation for a deeper analysis (Collis & Hussey, 2014). During the literature collection, specific factors that can be useful in answering the research questions, both from a macro and a micro perspective, are continuously analysed and then compiled in order to form the foundation for the interviews and the analysis.

A contextual background of HJS is first provided in the findings to aid the reader’s comprehension. Then, a compilation of data (both primary and secondary) is processed in order to provide a foundation for the analysis. Both microeconomic factors and macroeconomic conditions are necessary to address: the causes behind the collapse of HJS are determined from both perspectives, while the short-term effects on the industry are mainly be analysed from the latter. The discussion is utilising all the gained knowledge in order to answer the research question and finally, the conclusions are drawn based on the findings and the analysis.

2.2.1 Literature Collection

The data used in this paper originates from two distinct sets of sources. The information on HJS that is used in the introduction (chapter 1) is based on widely available trade and financial journals and magazines, as well other sources that are easily accessible via the Internet. These sources have not been submitted to a strict review process comparable to academic journals and periodicals and therefore, could be considered less reliable. These accounts are meant to provide only a general picture of the course of events of the Hanjin bankruptcy but are not accredited with academic credibility.

Information for the literature review (chapter 3), on the other hand, is mainly found in journals such as Maritime Policy & Management, Transportation Research Part A, B, C & E, Research in Transportation Economic, The Asian Journal of Shipping and Logistics, Transport Policy, among others. However, the literature review is complemented with information from reports from e.g. United Nations Conference on Trade and Development (UNCTAD), the Organisation for Economic Co-operation and Development (OECD), Danish Shipping Finance (DSF) and AlixPartners5. The most utilised keywords are: maritime, container, shipping, alliances, performance, Asian shipping, Korean shipping, Hanjin Shipping and CKYH(E). During the literature collection, articles are organised and presented based on their themes

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

5 An American consulting firm.

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The scope of the research has to be outlined to find relevant data for the literature review (Sekaran & Bougie, 2013). This research analyses the causes and effects of the bankruptcy of HJS. Likewise, in explanatory research it is vital to identify variables, i.e. measurable and/or observed characteristics of the problem, in order to understand the phenomena (Collis &

Hussey, 2014), which in this case are factors that can explain the collapse of HJS and its short-term effects on the industry. These factors are identified from the literature review (see Table 3), which further stresses the importance of an in-depth literature collection.

Two opposite problems are expected to arise during the search for literature. The first problem is an abundance of potentially relevant information on the shipping industry at large, whereas, it is significantly more difficult to find previous studies on both national (in a contemporary context) and company level. The former issue is solved by thoroughly assessing the relevance (both time and content) and quality (e.g. peer-review articles are preferred over non-reviewed), while the impact of the latter is diminished by extending the keywords during the search, for example, ‘Korean shipping’ is extended to ‘Asian shipping’.

In addition, no single source is able to provide a comprehensive picture of the events of the last years let alone current developments. The small pieces of available information on HJS in academia have to be combined from a multitude of different sources which are either outdated or give only a very fragmented account of the events of the last decades. This is where a research gap is discovered for the chosen topic, and the findings and the analysis chapters are continuing where the literature review ends. Consequently, the aim of this thesis is to provide a comprehensive account of the reasons for the collapse of HJS and its effects on the CSL’s closest actors.

2.2.2 Data Collection

The data for the findings (chapter 4) is mainly collected from primary sources in the forms of interviews in order to attain relevant, in-depth opinions and proficient conjectures. Interviews are preferred over e.g. surveys due to the need for more in-depth information. The interviews are complemented by secondary data, such as official business reports published by HJS6 and various professional journal articles and news articles that form loose pieces. Although a large share of the findings is based on secondary sources, it only consisted of raw data which then is converted into compiled data. Secondary data has the disadvantage of being potentially biased (Saunders & Lewis, 2012) and the authors address this problem by critically evaluating the quality of the available information. In line with this rationale, HJS’

own reports receive special attention as investor relation reports can be manipulated to paint a picture of their choice instead of presenting the whole truth (Saunders, Lewis, & Thornhill, 2012).

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

6 Presumably linked to HJS’ insolvency, many online sources regarding official company information are unavailable to the authors of this thesis.

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2.2.2.1 Interviews

Six interviews, of which one has two respondents from the same company, are conducted in March 2017. The interviews are semi-structured, recorded, conducted face to face, except for one Skype interview7, and around 60 minutes long each. The chosen carriers have offices all around the world, however, their Swedish offices or agents are contacted in order to enable interviews in person. The respondents from the interviewed carriers and agents all know each other, which has to be taken into consideration during the analysis. The semi-structured approach is chosen due to the respondents’ differing relation to HJS, hence, some questions vary from interview to interview. In addition, Saunders et al. (2012) state that it is the most suitable interview structure in order to understand relationships in an explanatory study. All questions are based on identified themes from the literature review (see Table 3), i.e. priori themes (Brooks & King, 2014), and are sent to the respondents in advance to ensure well- prepared answers and a high degree of relevant information. An overview of the topics that are discussed during the interviews is presented in Table 1. The interview recordings are supplemented with hand-written notes in case of any technical problems of the recording equipment and to remember non-verbal cues that might affect the situation. In the days after each interview, all respondents receive a comprehensive written summary of their interview and have the chance to correct any factual mistakes or misinterpretations before the therein contained information is used any further.

Personal background

HJS’ reputation in the industry HJS’ position in Korea

Factors related to HJS’ collapse Effects of HJS’ bankruptcy

Developments of alliances and market concentration Development towards larger vessels

Opportunities and challenges in the container shipping industry Developments of the maritime shipping industry in Korea, both carriers and ports

Future outlook of the container shipping industry

Table 1. Interview Topics.

The chosen topic is expected to occasionally lead to sensitive questions (i.e. political) and while one of the respondents prefers to stay completely anonymous for that very reason, another respondent wishes not to be directly linked to potentially incriminating statements.

Therefore, these two respondents are referred to as Mr A and Mr B. All interviews could be

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

7 Since Mr A is located on another continent.

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presented in an anonymous manner, however, it is expected that some findings will benefit if the information can be traced back to its original source. Hence, only two respondents are presented anonymously in the ensuing chapters.

2.2.2.2 Selection of Respondents

In order to answer the research questions, interviews with respondents with insights of HJS’

operations, and the Korean and international container shipping industry need to be interviewed. All the contacted respondents possess knowledge in at least one of these areas, i.e. a random sampling process is not implemented. The five respondents from the carrier (HMM) or the agents for the carriers (Evergreen, HJS and Yang Ming) have good insights of the carriers that they represent and the container shipping industry. Meanwhile, the two scholars have comprehensive knowledge of the Korean and international container shipping industry, and helpful information about HJS as well. All respondents appear to be very positive towards the interviews as they find the topic very interesting.

Mr A has intimate knowledge of the Korean shipping sector and assumed an advisory function at HJS in the past. A more detailed presentation of Mr A would not be possible without risking compromising the respondent’s anonymity. Mr A is not referenced by his name or title, in order to provide anonymity to Mr B as well. Nonetheless, the authors guarantee the credibility of all respondents, including these two.

The establishment of Georg Hansen Shipping can be dated back to 1979. The agency has worked for several decades on behalf of HJS and was the exclusive agent for HJS in Sweden.

Mr B is affiliated with the agency and can provide valuable insights to HJS’ operations since the authors were unable to contact any representative from HJS. Mr B is willing to participate in the interview under the condition that nothing specific can be traced back to him. In order to prevent the accidental exposure of Mr A, resulting from the possible cross-examination of the statements of both Mr A and B, it has been decided to provide the latter with full anonymity as well.

HMM was contacted as the carrier became Korea’s largest CSL after the bankruptcy of HJS and was HJS’ main competitor as they were both Korean carriers. Mr Håkansson Säll is the general manager for Sweden and Norway at HMM and has been working in the shipping industry for 25 years.

Overseas Liner Agencies (OLA) has been an agent for Yang Ming, one of the CKYHE members, since 1973. Moreover, some parallels between Yang Ming and HJS are expected to be drawn as both CSLs are from countries in the Far East which experienced similar economic developments (Lu, Cheng, & Lee, 2006; Shibasaki, Ieda, & Watanabe, 2005). Mr Lund is the chairman and managing director of the agency and has been working in the company since 1965 and has, therefore, established excellent contacts with the carrier. Mr.

Holmberg assumes the position of general manager for Sweden and the Baltics within the agency and has worked for the company, with an intermittence of 5 years, since 1989.

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Greencarrier is an agent for Evergreen Line, the carrier that joined the CKYH alliance in 2013. The managing director, Mr Hermansson, has worked for the company for the last 20 years and additionally has experience from other carriers and forwarding businesses as well.

Professor Song is the Korea Chair and Professor in Maritime Logistics at the World Maritime University (WMU) in Malmö, Sweden. He possesses extensive knowledge of the shipping industry and has had a considerable number of articles published in various academic journals. Amongst other things, he has covered the topics maritime logistics and maritime policy and management (e.g. (Cullinane & Song, 2003; Song & Panayides, 2002; Song &

Panayides, 2015) among others). Moreover, professor Song also has extensive knowledge of the Korean maritime industry.

2.2.3 Data analysis

A good analysis strategy has to be developed to enable the drawing of viable conclusions for this case study (Collis & Hussey, 2014). Thus, in order to answer the research questions, Miles, Huberman and Saldañ’s (2013) approach of analysing qualitative data is utilised. They argue that there are three main aspects in analysing qualitative data that occur simultaneously: data condensation, data display and drawing/verifying conclusions.

Data condensation refers to data collection and reduction, which “sharpen, sorts, focuses, discards, and organizes data in such a way that “final” conclusions can be drawn and verified” (Miles et al., 2013, p. 12). This first step is performed by categorising data from the interviews into different themes, which are identified by patterns relevant to the research questions. This approach is called template analysis (King, 2012; Waring & Wainwright, 2008) and although it is not as robust as other analysis approaches, it has the advantage of being flexible and structured at the same time (King & Brooks, 2017; Saunders et al., 2012).

Traditionally, it is not a very common approach for business and management research but has recently gained popularity because it enables a deeper analysis (Waring & Wainwright, 2008). What is more, template analysis can be utilised by both deductive and inductive research (King & Brooks, 2017) and is very appropriate for analysing data from interviews (King, 2012) as it is a useful tool to process rich data (Waring & Wainwright, 2008). This method accentuates contents of the interviews whereas approaches such as discourse and narrative analysis focus more on language (Brooks & King, 2014).

The chosen themes have a strong correlation to the literature review, i.e. deductive approach (King & Brooks, 2017), and cover a broader focus (e.g. future outlook) which encompasses narrower and more specific topics (e.g. development of freight rates, consolidation, trade, etc.) i.e. hierarchical coding. The findings are presented by this template approach, where illustrated examples from the respondents are provided. This emphasise on themes continues in the discussion by a theorising structure, enabling that “[c]asual links or patterns can be hypothesised and ‘tested’ with selected informants who may refute or verify them” (Collis &

Hussey, 2014, p. 155).

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Data display stresses the importance of presenting information in a structured and clear way in order to prevent hastily made and potentially wrong conclusions (Miles et al., 2013). To facilitate the data analysis, the data is constantly processed and divided by themes. In addition, to avoid any misunderstanding, the chosen themes from the literature collection are summarised in a table to provide an overview of the different themes; a commonly used method in template analysis (Bryman & Bell, 2015). As previously mentioned, these chosen themes constitute the basis for the interviews. This emphasise on themes continues in the discussion, where they are synthesised into new patterns, giving incentive for an adapted conceptualisation from the literature review. This illustration is continuously amended until all the data has been carefully analysed and is then presented in the beginning of the discussion (chapter 5).

Drawing and verifying conclusions refers to the interpretations and then the testing of these understandings. Although the authors have produced some interpretations in the beginning of the research process due to the creation of priori themes, the final conclusions are not made until all data has been collected and analysed. The conclusions are also tested as fellow researchers are going to scrutinise them.

2.3 Validity and Reliability

Validity is “in many ways the most important criterion of research” (Bryman & Bell, 2011, p.

42) since it affects the research’s credibility, transferability, dependability and conformability (Lincoln & Guba, 1985).

Credibility refers to the trustworthiness of the research (Lincoln & Guba, 1985). The respondents are chosen based on their various areas of expertise in regard to the research questions (see section 2.2.2.2 for a more detailed motivation). The credibility of this paper is further strengthened by ensuring that the respondents confirm the findings from their interviews. All secondary sources are always assessed for their overall relevance to the research questions and evaluated based on their suitability for the analysis needed to answer the research questions. Data, both from primary and secondary sources, that is considered irrelevant to the aforementioned process, is going to be omitted. However, relevant findings are not omitted, regardless of the data support or reject a specific argument that helps answering the research questions.

The degree to which the results can be transferred to other contexts signifies transferability (Lincoln & Guba, 1985). Generalisation is not always realistically possible (Shenton, 2004) and as the shipping industry has quite unique characteristics (Stopford, 2009), this research is not aiming for the transferability of the findings to other industries. However, comprehensive information about the container shipping industry is provided to establish the context of the research, allowing the reader to decide for him-/herself if it could be applied to other contexts or settings. The authors believe that the findings behind HJS’ collapse can be useful for other CSLs, i.e. a generalisation to the container shipping industry is anticipated.

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Dependability refers to how systematic the research process is conducted (Lincoln & Guba, 1985). All recordings and summaries of the interviews are kept to ensure the data is available during all stages of the research process. The authors’ peers discuss and question this paper, which act as an auditing process (Bryman & Bell, 2015).

The research’s objectivity is addressed by conformability (Lincoln & Guba, 1985). Although it is impossible to be completely neutral in business research (Bryman & Bell, 2015), measures are undertaken to avoid both researcher (Saunders et al., 2012) and interview bias (Collis & Hussey, 2014). Moreover, the discussion is based on the literature review rather than the authors’ personal opinions.

Reliability is a critical problem that mainly quantitative studies have to address but qualitative research has to be aware of the issue as well (Bryman & Bell, 2015). For example, both authors participate in all interviews and thus, interpret them together as well (internal reliability). Moreover, the themes of the interview question can be found in Table 1, which would enable the study’s replication in the future (external reliability). Specific questions are not presented as they change depending on the respondents’ affiliation with HJS. Yet, the (external) reliability of this study can depend on other’s access to HJS’ business reports since a lot of data used for the findings are from this source. The authors are fortunate to have been able to retrieve the reports before HJS’ website was discontinued after its official declaration of bankruptcy in February 2017.

2.4 Summary of Methodology

A qualitative research approach is required as in-depth data is needed to answer the research questions. As the literature review is central for the research, a deductive logic is applied although some inductive characteristics are featured as well. By approaching the topic from a multitude of thematic angles already in the literature review, the complexities and various potential sources of risk in the shipping industry are identified. This approach is chosen on the assumption that there was no single reason that could explain the events that led up to HJS’ bankruptcy rather than a myriad of events whose combined effects eventually led to the CSL’s collapse. An instrumental case study based on HJS’ business reports and interviews from six different foundations with seven respondents is conducted. To process the findings, the method of template analysis is utilised in order to enable a deeper discussion. Although the methodology for this research is important, the literature review plays an even more essential role as it lays the foundation for the consecutive chapters.

!

!

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3. L

ITERATURE

R

EVIEW

The shipping industry is influenced by a variety of factors such as ship supply and freight rates as well as economic growth and shipbuilding prices, to name the most important ones (Brauner & Illingworth, 2006). It is vital to understand the interplay of these and other drivers and how they connect to HJS in order to find the most probable causes and effects for the carrier’s collapse. Therefore, this chapter comprehensively covers these key forces, first on the level of the international shipping industry before delving into the sphere of the Korean maritime shipping sector. After having covered the carrier’s home market and relevant characteristics of the sector, the literature review is focusing on HJS itself before the chapter is concluded.

3.1 The International Shipping Industry

“Maritime transport is the backbone of globalisation” (UNCTAD, 2016, p. 5) and is vital for the international economy as the industry was responsible for approximately 80% of world trade by volume, exceeding ten billion tons, and 55% in terms of value in 2015 (UNCTAD, 2016). Thus, it can be argued that “[w]ithout shipping, it would be impossible to conduct international trade” (Drobetz, Schilling, & Tegtmeier, 2010, p. 94). The dependency, however, is mutual, meaning that the shipping industry is affected by the global macroeconomic environment (Drobetz et al., 2013; Merika et al., 2015), whereas local influences only have a limited effect (Drobetz et al., 2013). Nonetheless, government policies and interventions have the potential to change maritime trade (UNCTAD, 2016).

Seaborne trade is often divided into three categories: the bulk, the container and the tanker trade segment. In 2015, these segments accounted by volume for 53.88%, 16.79% and 29.3%

respectively (UNCTAD, 2016). Although, container shipping does not carry a very large share of the volume, it is still essential for world trade (Tran & Haasis, 2015) and is responsible for a major share of the total seaborne trade by value (Stopford, 2009). Hence, this large share of the value makes the container shipping segment more competitive than the bulk segment, as it entails the possibility of higher revenues. The container volume has grown from around 30 million twenty-foot equivalent units (TEUs) in 1990 (Cariou, 2008) to 175 million TEUs in 2015 (UNCTAD, 2016). Consequently, the container shipping industry has been studied extensively due to its importance to international trade (Drobetz et al., 2010;

Slack & Frémont, 2009; Panayides & Wiedmer, 2011; Woo, Bang, Martin, & Li, 2013).

The container shipping industry has grown rapidly due to an increase in international trade and technological advances, e.g. refrigerated containers, also called reefers, and increased vessel capacity. For over two decades, the average annual growth rate has been much higher than other sectors in the maritime industry with around 10% (UNCTAD, 2010). The containerisation system was pioneered in America in the mid-1960s and drastically increased the cargo handling speed at ports and enabled container shipping lines (CSLs) to offer door- to-door services (Stopford, 2009). Over the years, container ships have also continued to

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develop and have increased in size in order to benefit from economies of scale. For example, the average ship size in 2014 had more than doubled from the average of 2,000 TEUs in 2004 to approximately 4,500 TEUs (UNCTAD, 2014). Moreover, the average size for newly built ships in 2015 was around 8,000 TEUs and the largest deployed vessels are expected to carry over 21,000 TEUs by 2017 (OECD-ITF, 2015).

Containerisation started with the adoption of the ‘box’ by American carriers, such as Sea- Land and APL, and was then continued in Europe by liners such as Maersk and Hapag-Lloyd (Slack & Frémont, 2009). However, as a result of the rapid economic growth in East Asia during the 1960s and 1970s, the focus of growth in the container shipping industry shifted around the same time to the economically expanding region (Shibasaki et al., 2005).

Developing countries saw a need of national liner carriers (Poulsen, 2010), giving rise to carriers such as Evergreen (Taiwan), HJS (Korea) and OOCL (Hong Kong). It was argued that “Asian carriers will play a more important role in the advanced liner shipping industry”

(Lu et al., 2006, p. 209) and just before the financial crisis, 13 of the top 20 container carriers were from East Asia (Slack & Frémont, 2009).

Maritime container shipping has shown a remarkable development over the last several decades and closely follows periods of economic growth and decline. This connection and the ensuing cyclicality are fundamental elements of the industry and have shaped the sector consistently during this time.

3.1.1 Shipping Cycles and Uncertainty

The shipping industry is characterised by cyclicality which means that it follows a general trend of growth and decline only to grow again (Stopford, 2009). Stopford (2009) further notes that each cycle consists of multiple components, i.e. long-term trends that can last for decades at a time, as well as considerably shorter boom and bust periods that generally prevail only for a number of years. This introduces the element of volatility to shipping which is based on uncertainty as when a cycle starts, ends and how long it will to last (Albertijn, Bessler, & Drobetz, 2011; Kalouptsidi, 2014; Mitroussi, Abouarghoub, Haider, Pettit, & Tigka, 2016). Economic business cycles and seasonality are usually the drivers behind these short-term periods (Stopford, 2009) and determine both freight rates and the value of vessels (Albertijn et al., 2011). In fact, a close relationship between GDP growth and the changes of the volume in seaborne trade can be observed as both develop conjointly (Brauner & Illingworth, 2006; Notteboom & Rodrigue, 2009; Stopford, 2009). Ship owners for example aim to take advantage of these cycles, i.e. buy assets at low prices during a trough and sell them at a premium during a peak. Playing the cycles correctly is one thing, yet predicting them correctly can lead to riches, while failing to do so may result in immense losses when assets devalue and carriers are forced to sell them at a loss (Stopford, 2009).

According to Stopford (2009) the ‘typical’ shipping cycle has four phases: trough, recovery, peak/plateau and collapse. As the term indicates, the shipping industry passes through these four phases and the cycle is closed and starts anew, once the trough phase is reached again

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after a collapse. During a trough there are clear signs of overcapacity. As a result, freight rates fall to operating costs and less efficient vessels are laid up. Financial difficulties arise in the shipping sector as credit lines tighten and cash-flows begin to turn negative. Vessel scrapping and asset sales at distress prices might follow as well as foreclosures of either banks and/or carriers (Stopford, 2009).

A recovery starts when supply and demand become more balanced once more and freight rates begin to rise again above operating costs (Stopford, 2009). Market sentiment plays an important role in facilitating the recovery as it could produce improved access to financial means (Brauner & Illingworth, 2006).

The third stage, peak/plateau, is reached once demands begins to tighten and the surplus capacity is absorbed (Stopford, 2009). Freight rates still rise and asset values improve significantly while liquidity levels increase (Stopford, 2009) and bank lending becomes less conservative (Brauner & Illingworth, 2006). This leads in turn to an increased number of new ship orders as it unclear when this phase might end (Stopford, 2009).

Going the full cycle, a collapse is the last stage (Stopford, 2009). As more and more capacity enters the market, a gap between supply and actual demand begins to form which leads inevitably to falling freight rates. A general economic downturn or random shocks like the financial crisis of 2008 additionally reinforce this trend (Stopford, 2009). It is not uncommon that a considerable number of previously ordered vessels enters the market in this phase too, thereby accelerating the decline (Brauner & Illingworth, 2006). Efforts are made to reduce capacity by slow-steaming and ship owners are initially unwilling to sell their ships at a discount (Stopford, 2009). “The high barriers to exit give ship-owners reasons to delay capacity reduction; …, there is a tendency to hope that a redeployment opportunity will materialise or be created. This results in an industry with an almost perpetual state of capacity oversupply” (Brooks, 2000, p. 62). As the trend continues, the trough phase starts anew.

Since the beginning of the 2000s, the shipping cycle can be classified as expansion in 2003, peak in 2007, trough in 2008 and sideways8 movement since 2010 (Merika et al., 2015).

It becomes clear that shipping cycles have a perceptible influence on the available capacity of maritime shipping but it is necessary to discern more particular drivers for both demand and supply, to get a more detailed picture of the workings of the industry.

3.1.2 Supply and Demand

The shipping market establishes freight rates by a competitive process in which ship supply and demand interact (Stopford, 2009). While a shortage of capacity in times of increased demand for example is likely to result in rising freight rates, overcapacity in times of shrinking demand will produce the opposite (OECD-ITF, 2015; Stopford, 2009). The factors that are attributed with influencing both demand and supply are exogenous as well as

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

8 Presumably the trough phase as described by Stopford (2009).

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endogenous to the shipping market and trigger or accentuate the shipping cycle phases.

Stopford (2009) mentions ten major factors9 (see Table 2) but points out that there are many more. #

Demand Supply

1. The world economy 6. World fleet 2. Seaborne commodity

trades

7. Fleet productivity

3. Average haul 8. Shipbuilding production 4. Random shocks 9. Scrapping and losses 5. Transport costs 10. Freight revenue

Table#2.#Main!Criteria!for!Demand!and!Supply.!!

Source:(Adapted!from!Stopford!(2009,!p.!136).!

! 3.1.2.1 Demand

The world economy (1) with its changing growth patterns in different regions and even countries determines which volumes of which commodities (2) are traded by sea as well as where from and to (Sohl & Bella, 2014; Stopford, 2009). In the short run cyclicality in container shipping arises from the seasonality in trade that coincides with national holidays or their preparation, i.e. for example Chinese New Year or Christmas (Stopford, 2009). The rise of China as the ‘factory of the world’ and other emerging economies in Asia has led to a move of manufacturing facilities to the Far East and thus a geographical shift of demand (Albertijn et al., 2011; OECD-ITF, 2015). Additionally, unprecedented economic growth in the first decade of the new millennium (Panayides & Wiedmer, 2011) also manifested itself in the increased demand for shipping, amounting to 7.4% in the period 2004-2008 (DSF, 2016). More than halved, due to the economic crisis in 2008, recent demand levels, however, continue to perform even lower10 than during the crisis years.

The average haul (3) addresses the distance that needs to be bridged in order to deliver or retrieve a good to/from its destination and is measured in ton kilometres (Stopford, 2009).

Depending on the frequency of a liner service the demand for shipping can increase once for example routes are getting significantly longer as it happened when the Suez Canal closed.

Natural catastrophes, political events (including wars), or the numerous financial crises (4) throughout the last decades are not only hard to predict but have also led to a sudden increase or decrease in shipping demand (Stopford, 2009).

Stopford (2009) suggest that goods are only transported if the associated costs (5) of shipping can be reduced sufficiently to allow businesses to benefit from trading on the global market.

The growth of global trade can in fact largely be attributed to the relative cheapness of ocean

!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!

9 For more detailed explanation, see Stopford, 2009, pp. 135-174

10 3.2% for 2008-2012 compared to 2.5% for 2012-2016 (DSF, 2016)!

References

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